Automatic Data Processing Inc. (NASDAQ:ADP)

The financial data presents a comprehensive overview of the trends and changes in intangible assets over a six-year period ending on June 30, 2021. The analysis reveals several notable patterns in goodwill, software and software licenses, customer contracts and lists, other intangibles, and their associated amortization.

Goodwill

Goodwill shows a steady increase from 1,682,000 thousand US dollars in 2016 to 2,338,400 thousand US dollars in 2021. This upward trend suggests ongoing acquisitions or revaluations contributing to the company's asset base in this category.

Software and Software Licenses

This category experienced consistent growth, increasing from 1,811,600 thousand US dollars in 2016 to 2,950,800 thousand US dollars in 2021. The sustained rise indicates significant investment in software development or acquisition, supporting technological advancement or operational capability enhancement.

Customer Contracts and Lists

Customer contracts and lists expanded markedly, from 603,700 thousand US dollars in 2016 to 1,062,200 thousand US dollars in 2021. The considerable growth reflects increasing customer base value or contract acquisitions, enhancing revenue generation potential.

Other Intangibles

Other intangibles maintain relative stability, with a slight increase from 207,800 thousand US dollars in 2016 to approximately 239,000 thousand US dollars in 2021. This stability implies limited changes or revaluation in miscellaneous intangible assets.

Intangible Assets, Gross

The gross intangible assets rose from 2,623,100 thousand US dollars in 2016 to 4,252,000 thousand US dollars in 2021, reflecting cumulative increases in all contributing intangible components.

Accumulated Amortization

Accumulated amortization exhibits a consistent increase in absolute terms, from -2,088,900 thousand US dollars in 2016 to -3,041,900 thousand US dollars in 2021. This growing amortization reflects the aging of intangible assets over time, increasing the charge against earnings.

Intangible Assets, Net

Net intangible assets initially show robust growth, increasing from 534,200 thousand US dollars in 2016 to a peak of 1,215,800 thousand US dollars in 2020, but slightly decline to 1,210,100 thousand US dollars in 2021. This plateau suggests that the increase in amortization begins to counterbalance new intangible asset additions.

Goodwill and Intangible Assets, Net

The combined net goodwill and intangible assets increased markedly from 2,216,200 thousand US dollars in 2016 to 3,548,500 thousand US dollars in 2021. The steady rise highlights a growing base of intangible resources that could enhance the firm's competitive position, though attention to amortization trends is warranted.

In summary, the data reveals a sustained expansion in intangible assets driven mainly by investments in goodwill, software, and customer-related assets. While amortization steadily increases, dampening net asset growth, the overall intangible asset base continues to strengthen over the period under review.

The analysis of the financial data from June 30, 2016, to June 30, 2021, reveals several trends in reported and goodwill-adjusted total assets and stockholders’ equity.

Total Assets

Reported total assets initially declined from $43.67 billion in 2016 to $37.18 billion in 2017 and remained relatively stable through 2018. A recovery is observed in 2019, with assets rising to approximately $41.89 billion, though there was a slight decline again in 2020. In 2021, a significant increase brought reported total assets up to $48.77 billion, the highest in the period.

Adjusted total assets, which exclude goodwill, demonstrate a similar trend but at consistently lower levels. There was a decline from $41.99 billion in 2016 to $35.44 billion in 2017, continuing down to $34.85 billion in 2018. The adjusted figures rose in 2019 to $39.56 billion, followed by a decrease in 2020. Finally, there was a notable increase in 2021 to $46.43 billion. The pattern of decline and recovery mirrors the reported asset trend, indicating fluctuations in underlying tangible assets and goodwill adjustments over the years.

Stockholders’ Equity

Reported stockholders' equity shows a decreasing trend from $4.48 billion in 2016 to $3.46 billion in 2018. However, a marked increase occurred in 2019, rising to $5.40 billion, followed by another increase in 2020 to $5.75 billion, with a slight decline to $5.67 billion in 2021. This suggests improved profitability or capital retention starting in 2019 after a period of erosion.

Adjusted stockholders’ equity, which accounts for goodwill write-downs, is consistently lower than the reported figures and exhibits a more pronounced decline. The adjusted equity decreased from $2.80 billion in 2016 to $1.22 billion in 2018, then rebounded to $3.08 billion in 2019 and slightly increased to $3.44 billion in 2020 before declining marginally to $3.33 billion in 2021. This pattern indicates that goodwill adjustments had a significant impact on equity, particularly during 2016-2018, with some restoration in later years, albeit at lower levels than the reported figures suggest.

Overall, the data indicates that the company experienced a contraction in both total assets and stockholders’ equity during the early years, particularly when goodwill adjustments are considered. From 2019 onward, there is a clear recovery in both reported and adjusted figures, with substantial increases in total assets and equity. The divergence between reported and adjusted stockholders' equity underscores the influence of intangible asset valuations on the financial position. The recovery trend post-2018 suggests strengthening asset base and equity position after a period of contraction and write-down impacts.

The analysis of the available financial metrics over the period from mid-2016 to mid-2021 reveals several notable trends in operational efficiency, leverage, and profitability when comparing reported figures and those adjusted for goodwill.

Total Asset Turnover

There is a general upward trend in total asset turnover from 2016 through 2020 in both reported and adjusted data, suggesting improved efficiency in using assets to generate revenue. Reported turnover increased from 0.27 to 0.37 before declining to 0.31 in 2021. Similarly, adjusted turnover rose from 0.28 to a peak of 0.40 in 2020 and subsequently dropped to 0.32. The adjusted values consistently exceed the reported figures, indicating that removing goodwill from assets presents a higher turnover ratio.

Financial Leverage

Financial leverage exhibits more volatility with notable discrepancies between reported and adjusted measures. Reported leverage shows a decreasing trend from a high of 10.72 in 2018 to 6.81 in 2020, followed by an increase to 8.6 in 2021. Adjusted financial leverage is markedly higher throughout, peaking dramatically at 28.65 in 2018 before decreasing to 10.71 in 2020 and rising again to 13.94 in 2021. The larger magnitude and fluctuations in adjusted leverage suggest that goodwill significantly influences leverage ratios, reflecting substantial intangible assets impacting the capital structure assessment.

Return on Equity (ROE)

The reported ROE remains relatively steady, fluctuating between approximately 33% and 46%, with a slight peak in 2018 and a rebound in 2021. Adjusted ROE, however, is substantially higher and more volatile, reaching an extreme high of 133.28% in 2018 before settling to a range between about 71% and 78% in the subsequent years. This pattern indicates that when goodwill is removed, the equity base is effectively reduced, magnifying the return ratio and suggesting stronger equity profitability under the adjusted view.

Return on Assets (ROA)

Both reported and adjusted ROA follow a similar upward trend overall. Reported ROA increased from 3.42% in 2016 to a peak of 6.3% in 2020 before a decline to 5.33% in 2021. Adjusted ROA also rises from 3.55% to 6.69% before falling to 5.6% in 2021. The adjusted ROA consistently exceeds the reported, reflecting higher asset profitability after excluding goodwill.

In summary, the data indicates improved efficiency and profitability over time up to 2020, with a modest downturn in 2021. The adjustment for goodwill significantly impacts financial leverage and return ratios, amplifying the apparent profitability and leverage due to the reduction in asset and equity bases. The variations suggest that goodwill is a substantial component of the company's balance sheet, materially affecting financial analysis outcomes.

Total Assets

The reported total assets exhibit fluctuation over the six-year period. Initially, a decline is observed from approximately $43.67 billion in 2016 to about $37.18 billion in 2017, followed by stability in 2018. A notable increase occurs in 2019, reaching nearly $41.89 billion, before dipping again in 2020, and finally increasing to a peak of around $48.77 billion in 2021. The adjusted total assets follow a similar trend with slightly lower values due to goodwill adjustments, showing a decline from approximately $41.99 billion in 2016 to $35.44 billion in 2017, a steady decrease through 2018, then rising in 2019, declining in 2020, and increasing significantly in 2021.

Total Asset Turnover

The reported total asset turnover ratio initially improves from 0.27 in 2016 to 0.33 in 2017 and further to 0.36 in 2018, indicating enhanced efficiency in using assets to generate revenue. However, it slightly drops to 0.34 in 2019, rebounds to 0.37 in 2020, and declines to 0.31 in 2021. The adjusted asset turnover ratio exhibits a consistent pattern, slightly higher than the reported ratios in each year. It increases from 0.28 in 2016 to 0.35 in 2017 and peaks at 0.40 in 2020, before falling to 0.32 in 2021. This suggests volatility in asset utilization efficiency with better performance noted in the mid-period years, followed by a decline in the most recent year analyzed.

Overall Trends and Insights

The data indicate asset base volatility with significant asset base reductions early on and growth notably in the final year. The fluctuations in total asset turnover ratios suggest changing efficiency in the use of assets for revenue generation, with periods of improvement primarily between 2016 and 2020, followed by some decline in 2021. The consistently higher adjusted turnover ratios imply that goodwill adjustments modestly improve the appearance of asset efficiency. These trends may reflect strategic investment cycles, asset revaluation, or operational changes impacting asset management and revenue generation capacity.

The data reveals notable fluctuations and trends in the financial position over the six-year period.

Total Assets

The reported total assets initially decreased from 43,670,000 US$ thousand in 2016 to 37,180,000 in 2017 and remained relatively stable in 2018. Subsequently, there was an increase reaching 41,887,700 in 2019, followed by a decline in 2020 and a significant rise to 48,772,500 in 2021. The adjusted total assets closely mirror this pattern but consistently register lower values than the reported figures, indicating the impact of goodwill adjustments. The adjusted assets decreased from 41,988,000 in 2016 to 35,439,000 in 2017 and further to 34,845,200 in 2018, before recovering to 39,564,700 in 2019 and then declining slightly in 2020. A pronounced increase to 46,434,100 is seen in 2021.

Stockholders’ Equity

Reported stockholders’ equity declines from 4,481,600 in 2016 to 3,459,600 in 2018, then experiences a substantial increase to 5,399,900 in 2019 and further growth into 2020 at 5,752,200. A slight decrease occurs in 2021 to 5,670,100. Adjusted stockholders’ equity, which accounts for goodwill, shows a more pronounced downward trend starting at 2,799,600 in 2016 and falling sharply to 1,216,100 in 2018. This is followed by an improvement to 3,076,900 in 2019 and a gradual increase through 2020 and 2021, though it remains significantly lower than the reported values throughout the period.

Financial Leverage

The reported financial leverage ratio decreases from 9.74 in 2016 to 6.81 in 2020, indicating a reduction in leverage over time, before rising again to 8.6 in 2021. The adjusted financial leverage ratios, which consider goodwill effects, are markedly higher and more volatile. The adjusted leverage begins at 15.0 in 2016, remains around 15.85 in 2017, then surges dramatically to 28.65 in 2018. Afterward, it declines substantially to 12.86 in 2019 and continues to decrease to 10.71 in 2020, before increasing again to 13.94 in 2021. This volatility and higher magnitude suggest that goodwill significantly influences leverage measurements and that the company's adjusted equity base experienced considerable fluctuations.

Overall, the trends indicate that goodwill adjustments materially affect the assessment of asset base and equity quality. While reported figures show some volatility, adjusted figures suggest a period of declining equity value relative to assets, particularly around 2018, followed by partial recovery. The leverage ratios imply an overall lowering of financial risk until 2020, with a slight reversal by 2021, but adjusted leverage highlights greater risk exposure due to the impact of intangible assets on equity valuation.

Stockholders’ Equity Trends

The reported stockholders' equity exhibited a downward trend from 2016 through 2018, decreasing from approximately 4.48 billion USD to 3.46 billion USD. A significant recovery occurred in 2019, with reported equity rising sharply to about 5.40 billion USD, followed by a modest increase in 2020 to approximately 5.75 billion USD, before slightly declining to around 5.67 billion USD in 2021.

In contrast, the adjusted stockholders’ equity, which accounts for goodwill adjustments, showed a continuous decline from 2016 to 2018, dropping markedly from around 2.80 billion USD to about 1.22 billion USD. Although it recovered in 2019 to approximately 3.08 billion USD and then increased again in 2020 to about 3.44 billion USD, it experienced a slight reduction in 2021 to nearly 3.33 billion USD. This pattern indicates a more volatile and generally lower adjusted equity base compared to the reported equity during the observed periods.

Return on Equity (ROE) Patterns

The reported ROE demonstrated a generally strong performance, rising from 33.3% in 2016 to peak at 46.85% in 2018. It then declined modestly but remained robust in the range of approximately 42% to 46% through 2019 to 2021. This suggests sustained profitability relative to reported equity during these years.

The adjusted ROE, which considers goodwill adjustments, exhibited even more pronounced fluctuations. Starting at 53.31% in 2016, it sharply increased to 77.52% in 2017 and reached a peak of 133.28% in 2018, reflecting extraordinary profitability relative to the adjusted equity base during that year. However, it then decreased substantially to 74.52% in 2019 and hovered in the low to high 70% range through 2020 and 2021. These elevated values imply that the adjusted equity base was much smaller than reported equity, significantly amplifying the ROE ratio.

General Insights

The data suggests that goodwill adjustments considerably reduce the equity base, which inflates adjusted ROE figures compared to reported ROE. The sharp increases and subsequent declines in adjusted ROE around 2018 highlight a particularly low adjusted equity level that year, possibly due to substantial goodwill impairments or revaluations.

The rebound in both reported and adjusted equity in 2019 followed by stabilization indicates successful measures to strengthen the equity position. Meanwhile, the generally high ROE ratios reflect robust profitability, but the disparity between reported and adjusted metrics underscores the importance of considering goodwill's impact when evaluating financial performance.

Total Assets

There is a noticeable fluctuation in the reported total assets over the six-year period. The value starts at 43.67 billion USD in mid-2016, decreases to a low of 37.09 billion USD by mid-2018, then recovers to 48.77 billion USD by mid-2021. Similarly, the adjusted total assets, which remove goodwill effects, exhibit a parallel trend, starting at 41.99 billion USD in 2016, declining to approximately 34.85 billion USD in 2018, and then increasing to 46.43 billion USD by 2021. The adjusted figures consistently remain lower than the reported totals, reflecting the impact of goodwill adjustments.

Return on Assets (ROA)

The reported ROA shows an upward trend from 3.42% in 2016 to a peak of 6.3% in 2020, followed by a slight decline to 5.33% in 2021. The adjusted ROA, which accounts for asset adjustments, follows a similar pattern but at slightly higher levels, increasing from 3.55% in 2016 to a high of 6.69% in 2020, then decreasing to 5.6% in 2021. This suggests that the company’s profitability relative to its asset base improved notably until 2020, with a minor setback in the most recent year.

Overall Trends and Insights

The period from 2016 to 2018 is marked by a decline in both total and adjusted assets, indicating potential asset disposals or valuation adjustments. From 2018 onwards, a recovery in asset levels is observed, culminating in the highest recorded values in 2021. Profitability, as measured by ROA, improved steadily through 2020 despite the asset fluctuations, suggesting enhanced efficiency or income generation. The slight reduction in ROA in 2021 may warrant further examination but remains above the initial levels observed in 2016. The adjusted metrics provide a marginally more optimistic view of profitability, implying that goodwill had a dilutive effect on the reported returns.